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Testing the law of one price in retail banking: An analysis for Colombia using a pair-wise approach

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  • Iregui, Ana María
  • Otero, Jesús

Abstract

We apply a pair-wise approach to test the law of one price for deposit (lending) rates in Colombia. We find that when banks are of different sizes, deposit rates adjust quickly, suggesting a competitive environment. By contrast, lending rates adjust rapidly when banks are of similar sizes, supporting market segmentation.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 118 (2013)
Issue (Month): 1 ()
Pages: 29-32

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Handle: RePEc:eee:ecolet:v:118:y:2013:i:1:p:29-32

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Web page: http://www.elsevier.com/locate/ecolet

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Keywords: Law of one price; Retail interest rates; Colombia;

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  1. Q. Farooq Akram & Dagfinn Rime & Lucio Sarno, 2008. "Does the law of one price hold in international financial markets? Evidence from tick data," Working Paper 2008/19, Norges Bank.
  2. Goldberg, Pinelopi K. & Verboven, Frank, 2005. "Market integration and convergence to the Law of One Price: evidence from the European car market," Journal of International Economics, Elsevier, vol. 65(1), pages 49-73, January.
  3. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  4. Hashem Pesaran, M., 2007. "A pair-wise approach to testing for output and growth convergence," Journal of Econometrics, Elsevier, vol. 138(1), pages 312-355, May.
  5. Massimiliano Affinito & Fabio Farabullini, 2009. "Does the Law of One Price Hold in Euro-Area Retail Banking? An Empirical Analysis of Interest Rate Differentials across the Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 5-37, March.
  6. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesus Saurina, 2007. "A Test of the Law of One Price in Retail Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2021-2040, December.
  7. Lieven Baele, 2004. "Measuring European Financial Integration," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 509-530, Winter.
  8. Leybourne, S J, 1995. "Testing for Unit Roots Using Forward and Reverse Dickey-Fuller Regressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 559-71, November.
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